Vaccine Scandal Adds To China's Pharmaceutical Sector Woes

Recent vaccine scandal will impact the country's long-held ambition to become a major player in the global pharmaceutical industry.

Controversy around Chinese medicines further erodes public trust in domestically produced drugs.

Forecasts:

The Chinese pharmaceutical market will remain one of the most attractive markets in the Asia Pacific (APAC) region for multinational investment on account of its large market size (USD139.8bn in 2017) and the government's commitment towards improving the population's healthcare access. We forecast the Chinese pharmaceutical market to expand at a robust rate to USD332.0 by 2027.

Scandals regarding substandard pharmaceutical drugs will jeopardise China's ambition to become an international pharmaceutical leader. The current furore erupted in July 2018 after a rabies vaccine for humans manufactured by Changchun Changsheng Biotechnology, one of China's largest vaccine makers, was found to have violated safety standards. China's drug regulator accused the company of fabricating production and inspection records related to the vaccine. The company was ordered to halt production and recall all of its unused vaccines. Changchun Changsheng was also found to have earlier sold a substandard vaccine for diphtheria, whooping cough and tetanus. Chinese pharmaceutical stocks plunged, as the safety scandal over the nation's vaccines reminded investors of the series of food and product recalls from a decade ago that decimated China's reputation; damage that took years to repair. In the same month Zhejiang Huahai Pharmaceutical, a major global manufacturer of cardiovascular disease medicine valsartan, was also forced to recall a drug sold in the US after the European Medicines Agency found that it was tainted with a substance linked to cancer.

China's Urgent Need For Safe Drugs

Stock Price Of Changsheng Biotechnology

Source: Bloomberg, Fitch Solutions

China's healthcare industry faces challenges as drug safety dominate national conversations. There have been numerous product safety scandals in China since 2007 which will hurt the confidence of the 'Made in China 2025' plan, an ambitious initiative for the country to become a global leader in technology. According to Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai, 'The recent drug safety scandal will have quite a significant impact on the industry and investors will turn cautious toward the pharmaceutical sector, particularly the biological companies.' The industry-wide drug safety worries will be a setback for stock investors who have invested in pharmaceutical companies this year on the bet that earnings growth will accelerate after the government encouraged the development of proprietary medicines and improved the sales channels.

The latest case has led people to be sceptical about domestically produced vaccines. Many parents, worried that their children may become a victim of substandard vaccines, are now planning to travel to Hong Kong and Taiwan for safe vaccines. In Shenzhen, a city in southern China that borders Hong Kong, many residents expressed that they were ready to accept the higher costs, to have their children inoculated in Hong Kong. While domestically produced vaccines account for 95% of the mainland Chinese market, several Hong Kong private clinics provide foreign imports produced by global pharmaceutical companies such as GlaxoSmithKline and Sanofi. Moreover, foreign-manufactured vaccines usually get faster approval by drug regulators in Taiwan, compared to mainland China. For instance, Gardasil, an HPV vaccine made by the US pharmaceutical company Merck, was approved by Taiwanese regulators in 2007, however Chinese regulators did not approve the same vaccine until 2016.

The vaccine scandal came on the back of another healthcare debate in the country. The issue is centred on the needs of patients who cannot afford expensive patented medication, underscoring growing healthcare concerns in a country with a rapidly ageing population. The topic came to the forefront of Chinese public attention from a top-grossing film 'Dying to Survive', based on the real-life story of a leukaemia patient who brought low-value generic anti-cancer drugs from India. Although 95% of the Chinese population is covered by some form of public medical insurance, the coverage focuses mainly on basic medical care and excludes many life-saving cancer drugs or treatments. In July 2017, 15 cancer drugs were included in public health insurance schemes and in April 2018, the State Council announced the elimination of tariffs on imported cancer medications, in a bid to make foreign oncology drugs more affordable for the Chinese population. Moreover, in June 2018, the Chinese government announced that the country will encourage Indian pharmaceutical companies to register their high-quality pharmaceuticals in the Chinese market. The government will also encourage Indian drug companies to set up greenfield operations in China through incentives such as tax benefits and availability of resources such as infrastructure and manpower at competitive costs. In addition, in July 2018, India and China reached an agreement on reduction of tariffs on the import of Indian medicines, particularly cancer drugs, to China.